DRI-296 for week of 9-7-14: Airlines Fleecing Consumers? No, Columnist Fleecing Readers

An Access Advertising EconBrief:

Airlines Fleecing Consumers? No, Columnist Fleecing Readers

These days Americans fight fiercely for the coveted status of “victim.” In bygone days, we were rebuked for our headlong pursuit of success at any cost. Today, we compete to construct the best excuse for failure.

The favored tactic in the pursuit of victim status is to blame some malign force that has it in for us. Since something large enough to constitute a malign force will usually take on an impersonal character, it is hard to assign a personal motive to its actions. Consequently, it is convenient to claim membership in a class of people similarly afflicted by the force.

Consumers are a leading victim class because they are numerous and because they deal with large, impersonal institutions. Businesses are often nominated as victimizers precisely because their relations with consumers are usually so impersonal.

A recent example turned up in the Washington Post, August 28, 2014, and was entitled: “Are Domestic Airlines Making Money By Fleecing Consumers?” The byline read “By Christopher Elliott, Columnist.” (Hereinafter, he will be referred to as CEC.)

Using the logic of economics, we will discover that CEC’s column stands as an excellent example of consumers being fleeced by a victimizer who exploits their weakness. But the victimizers are not the airlines, as the column contends. CEC himself is the victimizer. And the victims are not airline consumers. They are the readers of CEC’s column.

Columnist Feeds Readers’ Victimization Fantasies by Demonizing Airlines 

CEC begins with this icebreaker: “Why are airlines raking in record profits?” Not pausing to wait for response to this rhetorical question, he responds by speculating. “Maybe they’re monetizing your personal data… without your explicit consent.” Is he about to reveal an investigative scoop? No, he was apparently flinging some mud on the airlines as a cosmetic prep for his next accusation. “Then again, maybe it’s the fees. Airline add-ons, which cover ‘optional’ services for everything from reserving a seat to changing a ticket, used to be included in the cost of almost every fare. But over time, airlines began separating them from base fares. They sometimes neglected to mention that little detail, helping them earn more money but frustrating customers, critics say.”

Decades ago, a journalism school would have used this sort of opening as a primer on how not to write a story. The word “maybe” is a tipoff to the substitution of the reporter’s personal opinion for fact. In this case, the author is a columnist, not a reporter. Does that give him carte blanche to throw his opinions around as though they were nickels rather than hefting them thoughtfully as if they were manhole covers? At the very least, he should offer some supporting evidence for the speculation that the airlines are committing criminal breaches of privacy. Even columnists do not have the privilege of casually libeling their subjects.

CEC then calls upon the favorite weapon of today’s marauding journalist – the supporting anecdote. A man “didn’t know about the change fees when he booked [airline] tickets.” He had to postpone his trip, and complained that “they charged me $300 to change my tickets” while offering him a $142, limited-duration credit instead of a fee refund. His reaction was classic victim-speak: “Airfares are outlandish, fliers are charged for everything and comfort is a thing of the past? How can that be allowed [emphasis added]?”

 

There ought to be a law! Or so says CEC – and a yet-to-be-determined number of U.S. Senators, whose legislative chamber has launched an investigation of “airline fee transparency and passenger privacy.” The investigation will “determine whether current rules go far enough to protect consumers and, if not, whether new laws are needed.” CEC’s phrasing seems unduly circumspect here; if the Senate finds that current rules don’t go far enough, experience tells us that no power on Earth will stop them from passing more laws.

The Senate, led by Sen. John D. Rockefeller (D-W.Va.), “wants to know exactly how much airlines earn from checked baggage, advance seat selection fees, preferred-seat fees and trip insurance” – data that the Department of Transportation (DOT) now doesn’t obtain to this level of disaggregation. In other words, the Senate demands the kind of information publicly disgorged only by public utilities, even though the airlines have been federally deregulated for over 35 years. The Senate also demands to know the airlines’ privacy policies.

CEC predicts that the inquiry will find “that airlines profit from fees and peddling personal data,” which will probably lead to more “consumer-protection” laws. He is not the only prophet quoted in the column. A “data-privacy advocate” also lauds Congress for “expressing interest in…the absence of any federal law protecting air travelers’ privacy.” Where once newspaper stories reported what happened, we now have columns that predict what will and/or should happen.

CEC dutifully quotes a “spokeswoman for …a trade organization for major U.S. airlines.” She insists that “domestic air carriers are committed to ensuring that customers always know the price of their ticket before they buy” and that airlines are “pledged to protect their custom4ers’ privacy.”

“Charging customers for services they value and are willing to pay for – which is common…globally – has also enabled airlines to provide consumers the ultimate choice and control over what they purchase,” she concludes.

CEC contrasts his predicted (!) Senate bill with one passed by the House, the “so-called Airfare Transparency Act,” which “would allow airlines to disclose taxes and fees separately from the fares they quote. If signed into law, critics say, it would give airlines a license to make money by deceiving customers.” But wait – isn’t the whole premise of this column that airlines are already doing just that – “fleecing” their customers through disclosure? Indeed, in the very next paragraph, CEC predicts that the Senate inquiry will produce “a noisy battle between [those] that believe the airline industry should operate free of consumer regulations and those who think that America’s air carriers are shamelessly fleecing passengers.” Then why do airlines need a “license” to do what they are already doing now without one?

So far, we can see that CEC’s column id dedicated to demonizing the airlines by portraying them as victimizers and their customers as victims. CEC’s fact-free libel of the major airlines is bad enough. But the way it plays on the economic ignorance of readers to stoke their victimization fantasies is even more reprehensible. Economics will show that the airlines are not victimizers; that their customers are not victims; that CEC himself is victimizing his readers by exploiting their ignorance of economic logic.

The Economics of Airline Competition

Marxists have traditionally used the phrase “it is no accident that…” to denote the coincidence of events with the Marxian theory of history. In that same vein, we might say that it is no accident that CEC begins his anti-airline diatribe by excoriating airlines for their “record profits.” The current anti-business vogue relies on a pejorative theory of profit as its foundational argument. Since victimization implies that the victimizer gains at the victim’s expense, some highly visible measure of that gain is a handy tool for exponents to wield. In this view, profit is good for business; business is the evil victimizer and consumers are the helpless, passive victims. So, what is good for business must be bad for consumers. Since everybody is a consumer and there are a lot more consumers than business owners, this is a promising line of attack for left-wing journalists.

The modern welfare state is an inflationist environment. Big government cannot exist and thrive without large – and growing – rates of spending. This is the left-wing, welfare-state equivalent of economic growth, the difference being that economic growth is organic, healthy and sustainable while inflationist, welfare-state spending is inherently artificial, unhealthy and time-limited. There are only three ways for government to get money to spend: by taxing it away from citizens, borrowing it from abroad or creating it in one of various ways. Successively higher taxes will eventually spark peaceful or armed revolution; borrowing will eventually exhaust foreign sources; and money creation will destroy the value of money through inflation. (That value includes not merely the purchasing power of money but, even more important, the ability of the price system and interest rates to efficiently allocate the flow of goods and services now and in the future.)

Continuous inflation causes nominal monetary values to rise continuously. This means that profits appear continuously to be increasing even though their true economic value may not have risen. For example, the purchasing power of profits distributed as income to shareholders may not have risen and may even have fallen even though nominal profits have gone up.

But this doesn’t stop the press from solemnly reporting that a particular business or industry has earned “record profits” in this quarter or year. The oil industry is the favorite target, but this tactic is adaptable to any business. In this case, recent news reports celebrated the record quarterly profits earned by American Airlines, United Airlines and Southwest Airlines, thus giving apparent substance to CEC’s lead. Neither those news stories nor CEC’s column bothered to tell the rest of the story behind these “records.”

First, monetary values rise every year, so there is a tendency toward annual record-setting as long as demand is relatively stable. That means that nominal values should be adjusted for inflation using a price index before any records can be detected. If that were to happen, the whole incidence of business record-setting would change dramatically.

Second, the airline industry is a special case. Reading CEC and other left-wing pseudo-journalists would give you the impression that the major airlines are rolling in profits and that you could have become rich by owning their stock. Uh-uh. Ever since airline deregulation got off the ground in 1978, the industry has been a bloody competitive battleground in which survival, not profits, has been the overriding goal of most members. Exhibit A: That “record profit” hauled in by American Airlines last quarter was its first since emerging from bankruptcy recently. American just paid a dividend to shareholders for the first time since 1980. United Airlines is better off, but not by much. And these are the survivors in an airline industry that once included firms like TWA, US Air and Midwest Express. Still want to travel back in time and own airline stocks?

Airlines are among a class of industries, also including railroads and broadcast media, that share the common features of high fixed costs and low marginal costs. In order to produce any output at all, the business must incur heavy costs of initial investment and setup. Once the business is operational, its marginal cost of producing an incremental unit of output – marching one more passenger onboard, loading one more car with coal or sending out the incremental broadcast – is extremely low. That means that such businesses often must incur a high debt load but can remain in business for a long time while just covering incremental costs with prices that fall short of profitable levels. It is a recipe for fierce price competition, low profits and some firms eking out a bare existence.

Prior to deregulation, the major airlines were fat, dumb and happy under federal-government regulation led by the old Civil Aeronautics Board (CAB). The CAB cartelized the industry, setting fares that allowed everybody a nice profit while keeping prices so high that most people viewed air travel as a luxury. Airlines competed by painting their planes different colors and offering competing snacks and beverages – not by lowering their prices.

After deregulation, the CAB was replaced by the Federal Aviation Administration, which ended controls over pricing and entry. Airfares plummeted. The demand for air travel zoomed skyward. Of course, many airlines had a hard time making ends meet even with this increased demand. The price of oil underwent periodic upward spikes and each one claimed a casualty or two from the airline industry, where oil-intensive aviation gas is a key input. The high union wages enjoyed by employees of the old-line firms like TWA, United and American were a heavy chain around the necks of the business, while Southwest Airlines built a consistently profitable business model based on non-union labor, safety, superior service and efficient management.

People like CEC, and most of his online commenters, never tire of bad-mouthing airline deregulation. Yet the years after deregulation provided a laboratory comparison in real time between regulated and deregulated airlines. Deregulation applied specifically to airlines engaged in interstate commerce; e.g., most of them. But many states still supported an intrastate airline industry of planes that flew only routes within that single state. And the fares of those airlines remained sky high. It wasn’t unusual to find regulated intrastate airfares that were much higher than deregulated interstate airfares for routes traveling longer distances and in higher demand.

Of course, anybody who actually believes CEC can always buy airline stocks and sit back, waiting to get rich. When that doesn’t happen, though, the buyer should blame CEC, not this writer.

In the broader sense, CEC and the political Left are barking up the wrong tree in the wrong forest by demonizing profit. During the last 36 years of deregulation, the sole airline to always turn a profit has been Southwest. And the perennial choice among consumers as the most popular airline has also been Southwest. In a free-market system, profit serves at least two indispensable functions: it identifies the sectors where consumers want additional resources to go and it rewards those firms that best serve consumer wants. In these cases, it is consumers that are in the driver’s seat directing the direction and amount of profit and consumers that ultimately benefit from the goods and services that are produced profitably. Nobody can claim that Southwest Airlines was a monopolist or an oligopolist getting fat by sweating money out of the hides of their customers.

The Economics of Bundled Pricing

Economics says that CEC is the opportunist capitalizing on the ignorance of his customers, not the airlines. Review the comments of the dissatisfied customer quoted by CEC: “Airfares are outlandish, fliers are charged for everything and comfort is a thing of the past. How can that be allowed?”

Airfares are not outlandish but cheap compared to the fares prior to deregulation. That refers not only to airline deregulation but also to energy deregulation, which eventually allowed the technological advanced that drove up domestic supplies of oil and drove down oil prices.

The comment that “fliers are charged for everything” is an obvious reference to the fees referenced by CEC. But the comment itself is inane. Of course consumers are charged for everything – how could they not be? Who else is there to pay for the goods and services consumers receive?

Business firms are not charitable institutions. The economic purpose they serve is to produce things more efficiently than we can ourselves. The firms must place a value on all the goods and services they produce because all of them require the use of scarce resources. Only if consumers are willing to pay the costs of all the resources used in production can we conclude that production is efficient. And we can’t draw that conclusion unless all of those costs are reflected in the price consumers pay. Moreover, businesses can’t remain in business unless consumer payments cover all business costs.

Economic logic tells us that CEC’s disgruntled customer is living in a left-wing fool’s paradise, where goods and services are magically provided free. But wait – CEC himself told us the same thing in the second paragraph of his column, when he said “Airline add-ons, which cover ‘optional’ services for everything from reserving a seat to changing a ticket, used to be included in the cost of almost every fare.” Right! And before deregulation, those costs were inflated by everything from union featherbedding and administered wages to government-imposed high fares to frills that consumers cared little about.

So what in the world is all this complaining over fees? Are the complainants really, truly saying “before the fee imposition I paid $X and now I’m paying $X plus the cost of the fee, therefore I’m worse off by the amount of the fee”? But that can scarcely be right, can it? Otherwise, airlines would have the business equivalent of a perpetual motion machine; all they’d have to do is arbitrarily pick something else to charge the customer for in order to inflate the cost of the ticket. (Charge the passenger for putting up the jetway, for taking the boarding pass, for delivering the safety lecture, ad infinitum.) In the fool’s paradise, airlines can arbitrarily charge any price they want when there is no government regulation to protect consumers. But as we now realize, it is competition that protects consumers, not government regulation.

Today’s fee increases are not arbitrary price increases. Instead, airlines are partially unbundling the elements of the airline flight in order to earn more revenue by allowing some customers to pay less by excluding elements that they don’t find desirable. They do the same thing now with beverage service when they offer alcoholic beverages for a price. By serving alcohol only to those few people who want a drink badly enough to pay for it, they allow the rest of us to fly cheaper than would be the case if they had to add on the cost of alcohol to the ticket price. This is not a strategy for raising prices but a strategy for avoiding price increases.

 

Why should the airlines want to avoid price increases? Deregulation has proved that the overwhelming bulk of the American public wants to fly from point A to point B as cheaply as possible – period. But there is a minority of the public that is willing to pay for amenities in the air. Airlines desperate to survive in the Darwinian struggle of the fittest that is today’s airline business are now trying to serve both classes of customers by keeping base fares as low as possible while charging the minority fees for those amenities that can be separately priced.

The political Left may find this competitive desperation unseemly but the one thing airlines shouldn’t be accused of is victimizing their customers. Unfortunately, that is how CEC

and his ilk make their living – by trashing free markets and their practitioners and victimizing readers.

When CEC’s Grumpy Old Man grouses that “comfort is a thing of the past… how can that be allowed?” he is apparently unaware that he is the one allowing it and that calling for government intervention is asking for the government to substitute its arbitrary dictates for his freedom of choice.

The reason “comfort is a thing of the past” is that consumers value comfort less than the cost of providing it. But if CEC or Mr. Grumpy objects, all they have to do is start their own airline and sell it to the public by advertising its comfortable amenities. If there is really a market for a Plush Air or Lavish Skies, lenders will pony up the cash, just as numerous lenders have done over the last 36 years to finance one failed start-up airline after another.

Full Disclosure? 

Is there the hint of a scintilla of a point anywhere in CEC’s disgraceful flight of fancy? Well, his consumer advocate (Sally Greenberg of the National Consumers League) punctuates her own silly diatribe against airline profits with the point that “many of the fees are poorly disclosed.” This is the only shot worth taking against the airlines among all those fired by the hand-held missile launchers of contemporary journalism.

A passenger who wants to change a flight should know in advance that a fee is being charged for the change. “In advance” means at the time of original purchase. Formerly that sort of notification was handled mostly by travel agents. But the same Internet revolution that has lowered the cost of term insurance by decimating the ranks of insurance agents and lowered the brokerage cost of stock transactions by eviscerating the ranks of stockbrokers has also winnowed the ranks of travel agents. And it is not too hard to imagine the relevant notifications falling between the cracks of the system. But a consumer can only fall victim to that kind of informational glitch once before being put on notice. That is not exactly like having your net worth confiscated by an airline.

Free markets are not perfect. But they work vastly better than anything else mankind has yet devised. Eventually the free market will even catch up with people like CEC, whose consumers are really the ones being fleeced.